Social Security Is No Problem, Unless We Make It One

by Donella Meadows

— April 7, 1999 —

Overshadowed by the agony of Kosovo, outshouted by the Dow crossing ten thousand, a surprising news item appeared on page 6 or 15 or so of most American newspapers last week. Social Security has received a stay of execution. Instead of going into the red in 2032, it may survive till 2040 or 2050. Medicare, once expected to tank in 2006, will apparently last till 2012.

The precise dates aren’t important. They are based on guesses about future economies, tax policies, and medical costs. They have changed before; they will change again. The “crisis” they portend is largely imaginary. But the politicians are still obsessed with “fixing” Social Security now.

Since it isn’t broke and won’t be any time soon, one can only suspect that their concern has more to do with present mischief than long-term security. That mischief is possible only because few of us actually understand the Social Security system.

So let’s get a few things straight.

First, we are not about to be hit by a rising tide of dependency. It is true that the population is aging and the retirement of the Baby Boomers is within sight. In 1960 there were 18 retirees for every 100 workers; in 2040 there will be 38. But at the other end of the age spectrum, there were 72 kids per 100 workers in 1960. In 2040, assuming no big changes in birth rate, there will be 40. The total number of dependents per worker will go down. School taxes may decrease, Social Security taxes increase, but the total burden in 2040 need be no more backbreaking than it was in 1960.

Second, Social Security has always been a pay-as-you-go system and it always will be. For decades Social Security was a simple transfer. Take payroll tax from workers; hand it out to retirees. Each generation supported those who came before and was supported by those who came behind — until 1983 when Congress began “fixing” Social Security by collecting more in payroll tax than was needed for current recipients. The surplus went into a “trust fund” to keep Social Security from going broke some day.

Now concentrate, here’s the part hardly anyone seems to understand. When money is saved in any form — in the bank, in stock investments, in Treasury bonds (where the Social Security surplus is saved) — it does not go into dark corners to multiply. It goes to someone who spends it and promises to pay it back with interest in the future. In the case of Social Security that “someone” is the government, which spends the surplus on weapons and national parks and disaster relief and Congressional salaries and such. The trust fund is a pile of IOUs. The total rises on the books each year with that year’s payroll tax surplus plus accumulating interest, ready to pay out when the Boomers retire.

Who will pay it? The taxpayers of 2016 or 2032 will, through their taxes. Who else? A Treasury IOU is actually a We-O-Us. So to save the taxpayers of the future from having to support the retired Boomers of the future, we are overcharging the taxpayers of the present, spending the money on other things, and setting up an obligation for the taxpayers of the future to support the retired Boomers of the future.

This scheme would make sense only if we were spending that surplus on things that would enhance the ability of future taxpayers to pay higher taxes. Things like great schools, or restored natural resources, or basic scientific research, or renewable energy systems, or a permanent lift out of poverty, or other budget items we are currently cutting. I must cynically conclude that the Social Security excess was created in the 1980s mainly as a cover for soaring Reagan deficits.

It’s still handy now to allow Congress and the president to claim we have a budget surplus, which we don’t, except in the Social Security account. Some of them want that “surplus” back as income tax cuts. To see the mischief in that, we need to know one more thing about Social Security.

The payroll tax soaks the poor way more than the rich. It is charged on the first dollar anyone earns; it is charged on incomes too low to be hit with income tax; it is charged only on the wages of working stiffs, not the interest or dividends or capital gains of the wealthy, it is charged at an equal percent on low and moderate incomes but not at all on incomes over $72,600. Next to some state and local sales taxes, it is our most inequitable tax.

When politicos make noise about cutting our taxes, this is the tax they never mention. In fact they have raised it steadily for years. When they propose using surplus payroll tax to cut income tax, what they are really saying is, let’s use the taxes of the poor to cut the taxes of the rich.

The idea that we privately or the government collectively invest in the stock market to “save Social Security” is even more self-serving. Its primary purpose is to bring the money of the little folks into the Wall Street casino to blow up the bubble of stock prices a little more, making sure that when it bursts it will spatter everyone. To see the insanity here, you don’t even have assume a stock market crash any time soon. You just have to ask what will happen when all those accumulated stocks have to be sold to pay out monthly checks to the elderly.

It’s also worth asking whether it is necessary or possible for every working person to save $250,000 or so (roughly enough to supply in interest the equivalent of present Social Security payments). Isn’t it easier, won’t it always be easier, to tax current workers just enough, and preferably fairly, to cover current retirees?

Most of us are willing to offer some of our productivity, our sweat, our time, our lives to support those who went before or who come after, who did it for us when we were young or who will do it for us when we are old. That’s a social bargain that holds us together. Breaking it apart won’t “fix” anything.

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The mission of the Donella Meadows Project is to preserve Donella (Dana) H. Meadows’s legacy as an inspiring leader, scholar, writer, and teacher; to manage the intellectual property rights related to Dana’s published work; to provide and maintain a comprehensive and easily accessible archive of her work online, including articles, columns, and letters; to develop new resources and programs that apply her ideas to current issues and make them available to an ever-larger network of students, practitioners, and leaders in social change. Read More

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